In today’s Finshots, we tell you why the government recently tweaked the Insolvency and Bankruptcy Code specifically for airlines and how it temporarily solves a long-lurking problem.

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The Story

The government just tweaked the Insolvency and Bankruptcy Code (IBC) to better suit the aviation industry. In fact, we wrote about the IBC a couple of days ago. So it might ring a bell. But if it doesn’t, it’s a law designed to help debtors (parties who owe money) and creditors (those awaiting payment) resolve matters when debtors declare bankruptcy. And it seems there’s one clause in the law that puts creditors in a tough spot especially if they’re associated with airline companies.

Here’s the deal: If a company faces insolvency, it can’t dispose of or sell its assets until the insolvency proceedings conclude. This waiting time, known as a moratorium, can last 6 months, 9 months, or sometimes even longer. For those leasing assets to airlines, like planes or engines, this means they can’t retrieve their assets or lease them to others during this time. This hampers their operations.

That’s exactly why the lessors (suppliers) associated with Go First were furious when the Insolvency Court stopped them from reclaiming their engines even though the airline hadn’t made payments. Go First walked up to bankruptcy court voluntarily in May, asking for a resolution since it could no longer meet its financial obligations. And its lessors argued that they could repossess their assets and fly them out using certain authorisations under the Cape Town Convention (CTC).

What’s that, you ask?

Well, back in 2001, 68 countries came together to attend a diplomatic meeting at Cape Town in South Africa. Here, a couple of intergovernmental agencies tabled a treaty. They intended to regulate transactions related to movable property of companies in the aviation, railways and space equipment sectors. So, if these companies defaulted on their financial obligations, lessors had the right to repossess their assets. India, among others, ratified it too.

Now, you’re probably wondering “Doesn’t that effectively mean lessors who are fighting to reclaim their assets in the Go First saga have a legal right to do so?”

Actually, no. Because here’s what we didn’t tell you. The IBC moratorium clause we spoke of overrides the CTC. This is because the Code explicitly notes that no law can supersede it in matters of insolvency. So, it renders the CTC’s provisions toothless. And that’s a problem.

Because as of 2018 nearly 80% of India’s commercial fleet is leased, compared to 53% worldwide. Leasing, as opposed to buying planes outright, can free up a lot of capital. Airlines could then use the money to discount flight operations for customers. They could focus on generating new business as opposed to paying back hefty loans. It helps them turn a profit. And that means lessors need to believe in the Indian aviation industry.

But if they have doubts about their ability to recover assets in the future, they might simply impose harsh terms and conditions while leasing planes and engines. They could also increase lease costs. And that has a domino effect. It becomes difficult for other aviation companies to work a lease deal. And they can pass down these higher costs to customers too.

In fact, the Aviation Working Group, a UK based global aviation watchdog recently downgraded India’s compliance rating because it didn’t meet international standards on aviation leasing laws. It sees the Go First situation as an unlawful attempt to snatch away lessors’ rights. And chances are that they could downgrade India’s aviation sector even further.

It’s not a good look for one of the fastest-growing economies. So, the government obviously had to act.

For starters, it plans to take a look at a parliamentary bill with an explicit focus on solidifying the CTC. If this bill passes, other laws may not be able to override it. It could benefit airlines too, since the OECD (Organisation for Economic Cooperation and Development) recommends lower loan processing fees for airlines of any member countries that pass a CTC legislation. But since that’s going to take a while, the government came up with a stopgap solution. It struck off the moratorium bit for aircraft and aircraft engines from the IBC, to calm lessors down. So now, lessors can reclaim their assets during Insolvency.

The catch though is that it doesn’t have a retrospective effect. And that means it won’t apply to cases pending in insolvency court. So Go First’s lessors can’t relax yet. They’ll still have to wait for the CTC Bill which might help them. But until then the battle’s on…

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